Seven ISA mistakes and how to avoid them
- Staying in cash
With interest rates languishing at rock-bottom levels for almost seven years and counting, you need your savings to work even harder to generate a decent level of income. Holding your money in cash can result in very limited returns over time. Our calculations show that if you had invested £15,000 into the FTSE 250 index over the 10 year period from 31 January 2006 to 31 January 2016 you would now be left with £ 35,455.49. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £16,076.25. That’s a difference of £19,379.24 – too big for anyone to ignore.
- Relying on past performance
While past performance figures will show you how a fund has performed over the last few years, it won’t, in isolation, tell you anything about future returns. You will need to do your homework and find out how this performance was achieved. Look at issues such as charges and in the case of an income fund the likelihood of the fund growing or at the very least maintaining its dividend payment. Also examine the manager’s track record and experience. Has the manager been producing good returns in different cycles, or only in rising markets? How stable has their career been?
- Confusing volatility with risk
If you had to sum up markets in 2016 in one word, it would be ‘volatile’. We have enjoyed a bull market for a number of years now and as bull markets mature, volatility does tend to increase. Corrections over the course of a bull market are normal, often creating a floor for the next uptick in markets. Don’t get spooked out of the market on the bad days. Rather stay invested, be patient and assess whether the dips present an attractive buying opportunity. In the words of Warren Buffett: ‘Be fearful when others are greedy and greedy when others are fearful.’
- Putting all your eggs in one basket
With a rocky start to 2016, many investors may want to shield their savings from volatility. The best protection against market uncertainty is diversification. A stocks and shares ISA allows you to spread your savings across a range of investment vehicles such as bonds, equities and funds. Yes, this is a more risky option than a cash ISA, but the true value of a stocks and shares ISA tends to manifest itself over the long term as our figures show, with returns superior to that offered by cash.
- Following stock market truisms
While most market adages have a ring of truth to them, many, especially those based on the time of the year, should be treated with caution. Sometimes they work and sometimes they don’t. It’s notoriously difficult to predict the best time to be in and out of the market, especially as the best and worst days very often tend to bunch together during periods of heightened volatility. There is a real danger that you capture the worst days while missing out on the best. Remember it’s time in the market that matters more than timing the market.
- Not looking under the bonnet of your funds
It always pays to know where your savings are going to end up, so make sure you look under a fund’s ‘bonnet’ and find out what companies the manager is investing in. Check that the companies can demonstrate sustainable growth, operational diversity and good management. Investing in funds focused on good-quality companies with strong balance sheets paying an attractive level of income will pay off in the long term.
- Short-term thinking
It’s important to be clear about your investment goals and how long you have to reach them. Volatile markets today shouldn’t worry you too much if you have built in enough time to reach your goals over the long term and you have the right investment strategy. For example, a younger investor with a long investment time horizon can afford to take more risks as their portfolio has more time to smooth out returns. Their asset allocation may therefore be weighted more heavily to higher risk assets such as equities. An investor nearing retirement will typically be looking to protect and preserve their capital pot and will prefer to lean towards safer assets such as bonds or cash.
Maike Currie is investment director for personal investing at Fidelity International